Last fall, Edward D. Breen, the chief executive of Tyco International (TYC), played the corporate chieftain version of Deal or No Deal. General Electric (GE) was selling its security division, and Tyco was among the likely bidders. The acquisition would have been Tyco's first big one since 2002, when the company nearly collapsed amid charges of executive fraud. Some investors worried that GE's eclectic mix of equipment-oriented assets wouldn't be a great fit for Tyco's service-focused business. "It would have been a stretch," says Deane M. Dray, an analyst at FBR Capital Markets (FBCM). Breen, 54, opted for no deal. When United Technologies (UTX) announced on Nov. 12 that it would buy GE Security for $1.8 billion, investors sent Tyco's stock up 3%.
Breen, however, was itching to buy a company. On Jan. 18, Tyco announced it was acquiring Brink's Home Security (CFL) (now operating as Broadview Security (CFL)) for $2 billion. One might have expected investors to flee on the news; instead, they cheered. Here Tyco was buying a debt-free company that could be plugged neatly into its business. Whereas the stocks of most acquiring companies fall after a merger announcement, Tyco's rose 2%. The lesson: Breen could buy, but he had to buy smart.
Eight years into one of the biggest corporate cleanup efforts in history, investors are still scrutinizing Tyco's every move. Breen has replaced the board, paid down debt, settled a huge shareholder suit, and broken the $41 billion-a-year conglomerate into three pieces. But for all of his turnaround cred, he doesn't yet enjoy the latitude given to other CEOs to pursue deals. "Tyco's history means it will always face a higher bar on acquisitions," says analyst Steven E. Winoker of Sanford C. Bernstein (AB).
That may complicate things for Breen, who is beginning to view dealmaking as essential to Tyco's long-term growth strategy. "We're now at the point where we can supplement our growth with acquisitions," he says. "We're in three global businesses, and we're the world leader, but not by a lot. We have an opportunity to become a much larger player."
To get there, Breen has worked to rid Tyco of the taint of the Dennis Kozlowski era. Under Kozlowski, Tyco became a symbol of runaway corporate excess, from the $2.1 million birthday party for his wife in Sardinia—complete with an ice sculpture of Michelangelo's David urinating vodka—to Kozlowski's practically deal-a-day buying binge that created a $36 billion conglomerate with close to $30 billion in debt. Years later, Tyco can't seem to erase those memories. "There are still portfolio managers in some places who will not invest in Tyco because of the hurting they took," says Edward C. Arditte, Tyco's senior vice-president for strategy and investor relations. That's a big reason why Tyco still trades at a discount to rivals: Its stock fetches 13.5 times estimated 2010 earnings, compared with 16.8 for its peers, according to Bloomberg data.
Yet Breen and Kozlowski couldn't be more different. There's nothing inside Tyco's new Princeton (N.J.) operational headquarters to suggest that its CEO is celebrating his success. Breen can be seen eating in the corporate cafeteria or pouring himself coffee in a small pantry where someone has taped a sheet promoting an employee weight-loss challenge. He doesn't even have a parking space; often he has to walk across the lot. "The thing that offends me most is arrogance," says director R. David Yost, CEO of AmerisourceBergen. "Ed has none of that."
Breen spent much of his career in the cable industry. He led General Instrument, a maker of set-top boxes, before selling it to Motorola (MOT) for $17 billion in 2000. He was president of Motorola, itself in the midst of a turnaround, when he suddenly quit in 2002 to rescue Tyco. "He said: 'If I can fix this, I could give something back to American business,' " recalls Frank M. Drendel, chairman and CEO of telecommunications company CommScope (CTV) and a longtime mentor to Breen.
Breen walked in to find a company crippled by the scandal, massive debt—$11 billion of which was coming due—and an obsession with deals. "I banned the word 'acquisition' when I came," says Breen. "Tyco was acquisitions on steroids." Jim Spicer, president of Tyco's SimplexGrinnell fire protection business, is the only member of the senior team from the Kozlowski era. "What Ed has brought to the table is visibility, stability, vision, and a sense of purpose," he says.
In 2006, Breen broke up the company, spinning off Tyco Electronics—which makes electronic connectors—and health-care products unit Covidien, both of which had strong balance sheets. Breen kept what was left, a $17 billion business that includes security (ADT Worldwide and now Broadview), fire protection, and "flow control" (valves and such). "Not a lot of managers willingly make their sandbox smaller," says Tyco's Arditte. Soon after, friends and colleagues began to wonder whether Breen "would have the same interest in a smaller company," says lead director Bruce Gordon. "And he did. His ego is not wrapped up in revenues."
Despite Tyco's improved health, Breen has lately faced challenges. The financial crisis sent sales down 15% last year and prompted Breen to lay off about 7,000 of 113,000 employees. Analysts don't much like Tyco's $1.4 billion electrical and metal products business, because it is tied to volatile steel prices and commercial construction, adding a big gust of unpredictability to a company that now prides itself on stability. And given its history of ignominious acquisitions, the notion of Tyco jumping into a series of big deals may be off-putting to some. "You can imagine how skeptical people would be," says Winoker of Sanford C. Bernstein.
Breen is committed to converting investors, one deal at a time. "Every deal we do has to make sense strategically and financially," he says. "We've got a strong balance sheet, and I'm never going to let that change."
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The Brink's Job
According to SEC documents, Tyco (TYC) chief Ed Breen approached Brink's Home Security (CFL) Chairman Carl Sloane to suggest a deal on Jan. 20, 2009. The pitch didn't work. Eight months later he called again, and Sloane was all ears. What changed? GE (GE) was selling its security business, a move that may alter the competitive landscape.
For Tyco's S-4 filing, go to http://bx.businessweek.com/mergers-and-acquisitions/reference/